At a time when spiralling energy costs, spurred on by the Ukraine conflict, monopolise the headlines, protecting highly challenged profit margins by paying only for precisely the water that you consume and process has never been more important.
Most British businesses, unless they Self-Supply or have a non-standard tariff agreement, were subjected to three cost hikes in April. Individually, these may not seem dramatic increases when compared to the widely discussed energy market, but collectively and across a high-consuming multi-site estate, they could add up, introducing another dimension of business risk and threatening strategic recovery and growth plans.
The first of these was a wholesale water rates increase. This varied considerably from region to region between 3.4% in the Thames Water region to 10.8% in Northumbrian Water.
The second hit came through the removal of price controls and additional price increases from retailers. Most retailers operate a ‘wholesale plus’ model whereby annual market increases and inflation are built in. With the removal of price controls in April 2021, we are now seeing these increases filter through to pricing.
Finally, the market regulator Ofwat was forced to take the unusual step of raising the retail price cap as a means to help retailers recover from unprecedented levels of bad debt caused by the Covid-19 pandemic. This adjustment has been set at +0.49%, considerably higher than the 0.31% anticipated during consultation on the issue. Over the two years that this measure remains in force, retailers should be able to recoup 75% of excess bad debt, in theory protecting businesses by reducing the risk of retailer failure. This cap only applies to customers using <50ML per annum. However, as Ofwat recognises that small businesses cannot cover the shortfall alone, it has given retailers headroom to increase prices for business customers across the board, echoing the energy markets where there is no price cap on non-household supply.
Moving forward, there are more cost considerations on the table too. There will be consultations on net margin caps throughout this summer, due for implementation in April 2023. In addition, the consultation process for PR (price review) 24 are well underway and this will determine the shape of the water market for the period 2025-30.
So, what can businesses do to minimise risk and prevent further chipping away at already slim margins? Fundamentally, a stringent meter reading programme is the only way to monitor consumption and to verify the accuracy of water bills across your estate. Alongside getting good data into your systems, we would urge investing more time scrutinising the accuracy of your water and sewerage bills. Good housekeeping in this way will almost certainly pave the way for bill reductions through early leakage detection and actionable insight for efficiency measures.
For five years now, the deregulated water market has enabled businesses to switch water retailer, or self-supply their own water, giving them the opportunity to take greater control over their water costs. Businesses that are yet to seize this opportunity may consider that now is a good time to test the market for a better deal, and to start reducing their exposure by prioritising water efficiency.